Welcome to the restaurant boiler room season six, episode 3. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, I will be playing a recent webinar hosted by franchise times. While I was invited as a guest speaker alongside a well known franchise private equity firm, we will tackle the following.


Concept dos and don'ts for franchisees accepting a private equity investor.


The restaurant boiler Room is a one stop shop for multi $1,000,000 merger and acquisition activity and financial complexities affecting the franchise industry. We talk money deals, valuations and risk delivered to the front door of franchisees, private equity firms, family offices, large investors and franchisors on a monthly basis. Feel free to find our content.


The bridal Capitals website at www.unbridledcapital.com. Now let's enter.


The boiler room.


Welcome to our deal makers week webinar. I'm Emily Wentland, managing editor of franchise times, and I'm excited to have with me today our three panelists, Rick Ormsby of Unboiled Capital, as well as Kevin Burke and Scott Romanoff of franchise Equity Partners. Rick is the managing director of Unbridled Capital and he is 20 years of experience.


In the franchise investment banking world, he's worked on hundreds of franchise.


Welcome, Rick. Kevin started as a partner in franchise Equity Partners about a year ago in March 2023. Before that, he founded Trinity Capital where he was managing partner in his time at Trinity. The firm completed more than $20 billion in mergers and acquisitions.


Financial restructurings and financial transactions. Welcome, Kevin.


Scott Romanoff is the Co managing partner of franchise Equity Partners. Previously, he worked at Goldman Sachs for nearly 30 years. Welcome, Scott.


Great to be here.


Our panel today is called do's and don'ts for franchisees accepting a private equity investment. Today we'll be speaking about green and red flags when it comes to accepting PE capital and the possible long term benefits and consequences of doing so. So let's dive in and Rick we'll start with you. Can you first tell us a little bit about unbridled?


Capital for those who aren't familiar.




Absolutely glad to and thank you Emily. And I would say I'm honored to definitely honored to be here with Scott and Kevin. These are some folks who are quite smarter than me. So I'll learn today more than I'll probably contribute, but yeah, and Bridle Capital's been around for a while and we, you know, help people sell and finance the companies. I've worked down a couple of notes of things that may be interesting.




I guess this this year we won our 6th deal maker of the Year award, which is pretty cool and and we're honored for that. It was because we closed 17 transactions in the most recent time period which is you know a lot you know because the market hasn't been very good for the.


Last year or.


So last week we sold 33 Little Caesars in Michigan and.


In this week.


65 Wendy's in Pennsylvania, Ohio and West.


Virginia for the Thompson family, so that that's kind of cool. New news. I do a podcast called the Restaurant Boiler Room. You might find that interesting, but a little known fact about us on bridal capital was named after unbridled the horse in the the winner of the 1990 Kentucky Derby and Unbridled went on to sire.


Grindstone, who was the 1996 Kentucky Derby winning horse and so as a sire Bridle was was actually more famous than as a racer. And that's how our company came to be. We're from Kentucky originally, but we're now in the paint handle of Florida.




Sir, thank you so much for that. And you know what deals has unbridled completed in the last year or so that have involved private equity?


Great question. I you know I took a pardon me for looking down my notes here, but I kind of studied the last couple of years here and thought I would pass this along. Maybe Scott and Kevin have some interesting, you know, could can think about this too, but.


In 2021 to 2020, two 23 and 24 estimated. I would say that in 2021 we completed somewhere around 35 to 40 transactions, 22 of them. So a little over half of them were to sold the private equity companies and six of those.


Transactions were new private equity entrants into the space.


Interestingly, in 2022 and 2023 combined, we have maybe you know a little over 20 assignments. We've completed seven of those have been to private equity and none of them have been to.


New private equity.


And so you know what we saw during the last two years is that over half of our transactions were being sold to owner operators.


Actually, and very few were being sold comparatively to private equity groups and we can talk about the reasons why that's happened. And then for 2024, we're projecting, you know, if we sell 15 assignments this year, you know that maybe 40% of them.


Or so will.


Go to private equity companies and we don't think there'll be any new entrants who are coming into their private equity.


Investment in the deals that we're doing there might be one, but there's been a pronounced kind of the downshift of new private equity into the space over the last three years after what was really a gangbuster time from 2000, what Kevin 1514, all the way to 2021.


So that's kind of that's kind of the the trend we see. And then when I'm talking about PE that we've seen in the deals that we do, we've we've probably participated in probably 10 or 11 brands over this time frame and we have, you know brands that.


We've we've put.


PE their existing or new into would be Taco Bell, Sonic, KFC, Pizza Hut, Popeyes, Papa John's.


Dunkin and Burger King.


Rick, from your perspective as a South side advisor, what would you say are some of the green or red flags for franchisees when it comes to accepting that private equity investment?


Yeah, yeah. And you know, again I.


Think you know?


Scott and and Kevin are going to have a really interesting perspective here because they're the ones actually making the investments right. And of course, Kevin had the experience prior to that working on the advisory side. Most of our assignments actually that are involving private equity, they're usually a selling franchise.


D They're not all this way, but most of them you would picture a middle America selling franchisee who is who's walking away from the business, not continuing with the new private equity investor. We have had a couple of examples of groups that, you know where the franchisee stays.


Along and so.


I mean, this is just a.


Handful of things. I'll talk about that.


Kind of right down here. I mean, some of the things that I would say could be red flags are what are the, what kind of what's the experience of the private equity firm. It's kind of the first thing that I ask and look at if I'm going to make, if I'm going to be an operator who's going to sell part of my company.


And continue to partner with the private equity group for five to seven years, or who knows even longer. I look at their experience and their track record for every deal that we do, there's probably 50 private equity, 75 private equity firms that talk about wanting to be in the space. But very few of.


Them actually do.


It so I like to see.


People with with the past.


Track record, obviously franchise Equity Partners.


That and you know, I want to see what their past success and failures are as well. It's a very small industry. These gentlemen and I know a lot of the same people. So you, you want to get references, you want to talk and find out what the reputation of the private equity group is. And if you hear anything bad. I mean honestly like if I hear one piece of bad news and.


It's kind of like being a restauranteur, if you, you know, your clients will never say, you know, your customers will never say good things about you. But if they had a bad experience they'll they'll say it really quickly. If you hear one piece of bad news about a potential private equity group and your reference checks in the.


Industry, I think.


That's a a big negative and something that to be.


Mindful of, I think you look at the personal fit between the principles of the private equity group and the you know, the franchisee who's going to partner with them and if they and if you know it's like sometimes just like the good old days, if you have a 10 minute meeting and you don't like the person, that likely means that it's going to be a, you know, 80% chance or greater that it's going to be a bad partnership, right.


I mean, all the other things aside, so you look for personal fit, that would be a red flag if you don't have a good personal fit immediately.


If you're not over the course of a couple of discussions, if you don't get a lot of clarity on your compensation and your growth and how you're going to fit in specifically to the future of the business.


Then I I I.


Start to wonder about that as well. So clarity and compensation and what's in it for the operator are obviously you know those things.


Have to be.


First and foremost in the operators mind and so you want to make sure those things aren't aren't forgotten. I mean, I think I also look at the type of private equity person and company and what they've invested in in the past outside of the space.


So for example, like I was telling you before this, before we started, that was in New York last week and I met with like four or five different groups up there and they're.


Decidedly different types of companies.


You know, one of them is a growth investor, but if they're going to be in this space, they want to invest in brands that are.


Really growing fast and are.


The premier brands.


Like let's say they want to buy the Mercedes type of business.


And then one of the meetings I had was someone who wanted to buy the old beat up pickup truck that barely operates and they want to turn it around. So you want to match the type of company you have and the type of philosophy you have as an operator with the type of investor you have. You wouldn't be a good investor or a good operator for a fixer of, you know, don't spend any capital here.


You know, put a Band-Aid on it and make the operation better. If you are the type of person who's building new.


Units and excited about.


You know the Premier brand that you have and that.


You want to grow, so that's that's.


Another item and then I I guess.


I would if.


I had anything else to say. I would say, you know, what is the support structure look like at?


The private equity group and you're going to?


Be a partner if it's just one dude you know. Be wary, be knowledgeable about.


What the support structure is because the support?


Structure of the private equity group is the real strength in what?


They provide not just the money.


Money is one thing, but I mean really, there's lots of money around. It's really the the relationship and the support structure. And if you feel like you get the heebie jeebies when you start asking about you know how they're put together and who's on the team, I think that's probably a red flag for.


You, Scott, let's pivot to.




Can you tell us about some of the more recent deals at?


Franchise Equity Partners that have involved franchisees, you know what made those attractive from your perspective.




Sure. And again thanks for having us and it is great to be here with Rick. He really is at the epicenter of restaurant transactions and knows the difference between private equity and strategics. And a lot of what he says you know, really, really resonates.


With us, you know, to answer your question, Emily, you know we basically as minority investors who invest like a family office on a permanent basis. We start with kind of two premises, you know, premise 1.


Is we just want to work with the best in class operators because we're a minority and because we're going to be permanent, we're going to look for the long term and it's a little bit like Hotel California. We don't craft an exit strategy on day one. So the partners we select that are quick with us.


You need to have a lot of confidence in them and at the same time, not only are we marrying with the partners, we're also marrying with the brands and same thing we're going to be in these brands for the long haul.


So they need to be franchisors that you know, we think are going to be supporting the business, supporting the system and folks, you know, we want to represent in the market for a very, very long term. So you know the type of businesses you know we we like to focus on are the ones that have a lot of brand.


Equity have a lot of customer loyalty and irrespective of the vagaries of being in the restaurant business, you know, day in and day out, they're going to have customers who are going to want to dine at these types of business.


And so Kevin, turning to you now from the perspective of someone who's experienced in the private equity space and Scott, feel free to chime in here, what should franchisees be on the lookout for in regards to accepting a PE investment or not?


Well, I I think that you know, echoing some of what Scott said about FEP, it's important to have a partner, not an investor or not an owner, if you will. And I think that you know, everybody in the private equity space.




Very loquacious about their partnering, but there are people that actually partner with operators and there's those that buy them. And yesterday you were a prospect. Today you're a client and it's a different environment. So I think that you know, the things that private equity firms should be looking for is.


Well, first of all, you know, they should ask their counsel to do run a LexisNexis report and just make sure that your private equity partner is not, you know, overly litigious and has, you know, a big stack of court cases. I think that's something that is perfunctory.


But also gives you. It's a little bit of a Canary in the coal mine, if you will.


I think other things to do are as as Rick had mentioned so eloquently, you know, you got to go down the checklist and talk to people in the industry, find out the deals that the firm didn't do, the ones that they pursued and and how that turned out, find out about how the failures did because the great deals are the ones that are always front and center on the website and they talk about.


But you should, you know, shoot for the middle because not everybody is going to, you know, have the best deal of their life every time.


I think other things to do are to is to try to get into a little bit of specificity about how they would interact. And again, harkening back to what Rick said about.


You know having.


A team. So for instance, we have a team of data analytics professionals that can help scrape the web for pricing information for sales information.


The real estate issues and other things in the P&L and that can be a tremendous benefit to a franchisee who doesn't have the width or breadth or of financial resources to you know, staff a first class team.


Like that. Similarly, you know we we have financing experts that you know can if the franchisee wants assist them and and running a really thoughtful process of obtaining financing that best meets their objectives and a lot of franchisees check in on interest rate and.


Maybe a couple other things. They're not looking at documents or not looking at hedging provisions or not looking at, you know, call on the loan.


And so a lot of times, you know, it's sort of quickly assembled and we can be very helpful with that with you know, our finance team and then I think that you know, supporting A franchisee is also, you know being there when they call you, you know at nights and weekends and whenever and really developing A comprehensive relationship more.


Friendship, in addition to your business relationship so that they can fight in you and you have more frequent conversations and more productive suggestions back and forth. And it's not a stiff quarterly board meet.


Thing and the firms that have done a good job, they're reputation precedes them and I think that investment bankers like Rick are very clued in on those that make real partners and not owners, if you will.


Kevin at franchise Equity Partners, when you're evaluating possible deals, what do you look for like what makes you think you know these franchisees have it together, they're going to be a?


Great partner for us.


Right. That's sort of the inverse of what I just alliterated for. You know, what should a franchisee be looking for, you know, Scott and I and our other colleagues, you know, we're we're always looking for a character, first of all because you.




Work your way out of a bad deal with a good character, but you can't work your way out of a bad deal with a bad character, so we, you know, we really want to make sure that we're dealing with people.


That have, you know, a a great, you know, a great integrity and A and a great reputation.


And and care about people. And are, you know, not ruthless and so forth. And that's sort of a first screen and you just get to know that by socializing with people in the industry. I think that, you know, after that we look for good brands, brands that have good advertising funds, good brand leadership or not like for instance one of the top 25.


Brands, when they sell things in CPG world, they remit half of that money to the franchisees.


Most of the top 25 concepts, when they have a CPG deal, franchisees get nothing. In fact, they're probably get a little bit of encroachment. So you know, I I think there's brands that are you know more to our liking and ones that you know perhaps are not and we have to, you know, do our work on the brand to make sure that we've got a, a trustworthy.


Partner, now we've got a trustworthy brand and then the next thing we look at is you know, financial diligence and one of the best things to look at is if you look at an FD and you flip it around backwards, if you turn to the back, there's litigation and hopefully there's only one or two.


Pages and then there is stores at the beginning of year. Stores built, stores closed stores at end of year.


It's almost given that when you see that number getting bigger every year for a long period of time, it's a really good referendum on the brand and you know we look for things like that. And then I think the other thing is the EBITDA margin as a percentage of sales is a really good referendum on somebody stewardship of the business that they're growing, right? They're remodeling, right.


Their labor is right, their food cost.


Right. Their paper costs. I mean, they're really managing the business, but not just the top of the P&L, but they're, you know, they're looking at everything and those are the kind of partners that that we look for that are scrupulous. And looking at things like that because we do too, and we're going to have a better partnership if we agree that, you know, no stone should be left unturned.


And those are the kinds of things you find out during diligence and meeting with people and and doing your homework in the marketplace. And I think that our structure of investing between 20 and 49.


Percent, I think it's it's it's rather unique, something like 90% of all private equity funds raised are control funds. And so the ability to be a real partner financially because if you come in and buy somebody's company and you get a loan on it and you put in the minimum equity, you maximize your leverage minimum.


You're really leveraging the equity of your partner in that?


Structure and so I think a lot of the controlled deals are you know not as aligned as we are. If we come in and invest 45% and the upside opportunity for our partner is meaningfully higher and you know and if we get into quicksand we.


Look at each other.


We're both in trouble as opposed to somebody having a management incentive plan.


That is, you know, the minimis and the total capital structure, that it's just a better alignment of interest. So we're really comfortable with that. And our portfolio clients are are very comfortable with.


As well.


I was going to jump in and just say, you know, as I heard a couple of things that Kevin said, that one thing came to mind. I bet, you know, we all have to scream for a fit in a sense of whether somebody can have a partner or not. You know, I I think a lot of these franchisees who built these businesses have done them as entrepreneurs. Heck, I, you know.


I kind of feel like that's what I am in a sense and so.


You know, I look at, if I was looking at partnering with another company, I I mean I like I've got to give up a little bit of what you have myself so to speak, if I'm going to bring on a capital partner and and I'm sure these gentlemen, you know, whether it's whether there's a formula of how to, how to assess that or whether it's a feel, you know they're they're.


You know, it takes a certain type of person who can take.


Make a yeah, whatever. 30 forty $50 million EBITDA business that they've grown with their own hands and then, you know, kind of partner with it in the next phase. It's not everyone who.


Could do that.


And then I would I was going to say and and and not everyone, maybe not even many people could do that. It it, it's actually probably only a handful of people can do that well.


Well, that that brings up something I I thought about. I've got a long time client that you know, I really love and.


And to your point, Rick, he's absolutely not partnership material because he has very thin skin. He wouldn't take constructive criticism while he his SG and A is a is a bit of a a hay barn and you know it just you're absolutely right. I mean some people are born to be.


Partners and some people you know don't fit into that as well.


You know the point, Mick Rick is making is really, you know, critical about scale.


And you know, as we as we think about all the different screens around partners and brands, you know, Kevins mentioned them all and some of them are just table stakes. You want you want to be with people that you want to have a meal with, you want to be with people who have integrity, but it's a unique entrepreneur.


Who can actually go from running a 25 unit operation to a 75 unit operation to 150 unit operation?


And you need to really partner with those types of folks if you're going to look to deploy your capital into growth businesses. And that's obviously, you know, the dream of of every every investor. So having not only a growth mindset, but having a track record in the well withal to.


You know, is really, really important and you know that's also where we feel like it's a little bit of our secret sauce and our and our value add, which is basically not only giving people the checkbook to grow, but giving them the support system to grow. So rather than forcing an entrepreneur to decide between growing or selling.


Because they don't have the capital we would give them the opportunity to not only access some growth capital and remain in control, but have things like a investing team to help them think about the optimal capital.


Structure A, you know, capital markets group that can help them scale their bank relationships to the next level and then have a data analytics function that will allow them, you know, to compete with the top ten top 20 franchisees in the country. But you know not be able to kind of support that on their own.


So there's a bunch of skills, not only that the operator needs, but the capital partner also needs to bring to the table to help an organization get to the next.


Yeah. Thank you for that, guys. No, back to you, Rick. No, in your experience, what are the long term benefits or even consequences of franchisees accepting private equity money?


Yeah. Well, well, I you know, again, I I kind of started jotting down answers here because of the page is like scrolling this long right of.


Things to think of.


Yeah, I I mean I'm I come from the standpoint I'm generally not, you know realistic or slightly optimistic guy, but I will make this comment and my general opinion is that less than half of the partnerships actually work out like that's just, I mean I don't have any.


Data to support.


That, but I would say I come from the mold of maybe I'm a little cagey like that.


That that, I think it's it's probably not going to work out well that you know 60 to 70% of the time.


Them. And so I'd look at things through that lens. When I think about partners of any kind. So from that lens, I say, what are the consequences? Well, you know, positives and negatives, let's start with the the positives and we go to the negatives, I mean the.


Positive consequences are you?


Know you hope when you do something like this that this is a way to monetize some of the value of your business that you've spent your whole life.


Creating many of these folks, me included.


And I've spent so much time and blood and sweat and tears into the businesses that we have that they look to us more like.


A spouse or.


A child than they do a business. I mean, we care about them that much and it's very emotional and very difficult to figure out how to extricate yourself from these businesses. Number one. But #2, you know, you have a lot of value in most of your net worth.


Likely tied up into these businesses, so this idea of marrying up with a partner if it works out well, you know, taking some of the money out of your business and placing it in your pocket. But then having a partner that can help you scale it and grow it to maybe have even a better outcome and.


Future in theory, that's a really great positive consequence. I'll also say, you know, as an aside, the franchise equity guys like it is true, I mean like they they are very unique in their minority investment. What they do in our space. I mean it's there are very few that do it. So for those of you who listen or watch, I mean that's that's absolutely right.


They're unique in that way and and valuable in that way. And I think it's a an area of the the market that.


We're going to see, you know, more and more activity in. You're also going to have the the positive consequences or the capital grow. You know we've talked about like the positive consequences with you know, data analytics and capital markets and some of the things that become really difficult for someone who just runs a business and wants to please customers and wants to keep their employees happy.


Some of these high finance things are just not.


I mean, they're just not overly familiar with someone who's built a business that, that, that, that needs to become two or three times stronger. So most franchisees, I know that own A50 unit business or whatever the number of units you know is most of them.


Have are, are, are.


Woefully underestimating that that value they they really are, and there's a lot of synergies they're missing.


With the financing and the, you know and analytics of their businesses, I mean it's like an area that.


They don't really you.


Know use or see much of.


You have a little bit less personal pressure of running the business. I mean, you're probably still going to be only personal guarantee. You're probably going to be the face of the franchise to franchise or you certainly have a partner that you're that you know in a capital provider that you're going to have to answer to. But there is some element of you have taken some of the value of your business off of.


Table and you have a team around you.


Instead of the.


Pressure of being, you know, a sole proprietor.


So to speak.


And and that's a real thing, having gone through COVID and some of the last four or five years, you know, I see the psychological and emotional fatigue that.


Some of these operators go.


Through it's a.


Lonely place Emily to own a business. I mean, I don't want.


To sound like Lowe's.




But you know, everyone wants to paint a business owner as somebody who has it made all the time and it's absolutely not true. It's a it's a lonely and sometimes dark place to be, to not have partners around you to rely upon. And that is a a big benefit, a big green flag, so to speak. You hope that if you marry up with Scott and Kevin and team or somebody.


Like them that you're producing long term economic value for you and your family and maybe a way to structure it.


That the gross proceeds of your net worth are higher, but also the net proceeds of your of your net worth are even higher than that because they have all kinds of creative ways to think about creating and holding and keeping value. And then there's also, you know some some people get to walk around with fancy shoes and a nice suit and they have the power and prestige of having a big company.


And then that's pretty cool too, you know.


I don't that doesn't.


Do it for me, necessarily, but it does for a lot of the franchisees as they grow their businesses and you'll see them flying on private planes and and having Gucci shoes. You're right, guys. I mean, you know, but it's some of the things I would talk about for red flags though to be cautious of and you know.


I know a lot of people say they talk to private equity and you know they're, you know, and it's kind of a buzzword. It has been for the last decade, the loss of control is a real thing. Be cognizant of that. It's a real thing. I will say that private equity, like anybody else, doesn't really want to spend money if they don't have to. They would like to borrow money, right? That's the highest return. So.


You, you know, a lot of.


People erroneously go down the route of exploring this Ave. thinking that they're going to.


Have A and this is maybe less sophisticated folks, but thinking that they're going to have a private equity group that's going to write an equity check for their entire value of their business and then going to have an equity check ready for every capital expenditure that they do, well, that's not the way a private equity group gets it, maximizes the return on investment. So they're going to be borrowing money.


They're going to be scrutinous on how they spend capital. I mean, you can drive around a lot of the areas of our country and unfortunately you can see private equity deals.


Gone bad with.


Potholes and roofs that are leaking and.


And you know Windows that are all fogged up and closing hours that are sooner than they should be because of some private equity groups don't want to spend the money right and make the long term capital investment. You have to think about your job security when you have a, you know when you have a new when when you have a new partner. I mean you're not your own master of your own fortress, you know you.


You know, so your job security.


Becomes a bit of an issue.


And you'll likely work harder for a private equity group partner than you would working for yourself.


Differently, but you'll likely work harder. Some people might have the erroneous perception that if they take some of their money off the table and.


Partner with the group.


That that means they're going to be on easy street and hanging around for 20 hours a week and providing some expertise. That's not what Scott and Kevin or anybody.


Else is really looking.


For you know what I mean, they're looking.


For someone that.


Young and strong and ready to roll. You know they get their return by building more units. That's one of the biggest ways they get their return. And it takes energy and time and resto to build more units. In many cases build 30 or 40% more stores than what?


You currently have.


So that's a misperception. Lastly, I would say.


And this is a kind of a whammy. So I'll say this about the negative consequences and you guys might disagree. We are just now getting kind of into the phase where the 1st and 2nd wave of mainstream private equity groups are selling the companies that they bought. Now, there's been some notably strong and really good examples, especially in systems like Taco Bell.


And others that have been great plans. But there are a lot of quiet.


Examples of private.


Equity firms who have had a really bad return, not really bad.


And those.


Don't get talked about.


A lot, but they're out there and I would say they're out there 3:00 to 1:00 or ones that have a good return. So I think there is this quiet concern out there both amongst the private equity groups, but also amongst the potential operators that invest with them that this second, you know, person.


The the the.


The operator is just now becoming aware of it.


That, like the returns, may not pan out. What we think they will, and the the risk is higher than what we thought it was.


Rick touches on so many important points there. I think first and foremost, you know his point on control and and working is.


Really resonates, you know, first and foremost, I think when someone thinks about taking on private equity, they should think about where they want to go rather than where they are today.


So if you kind of like the status quo and you're a 25 or 50 unit operator and you're getting a nice cash flow every year and you like kind of the current state of your platform.


You probably should just stand pat if you want to take your business to the next level. The math you need to think about is, am I going to have a bigger pie, but only own 60% of that pie rather than own 100% of something?


Smaller and if the scope of your ambitions is to be a multi 100 unit operator, that's probably going to be a better result at 60% than 100% at 25 stores. But I think you got to really have that growth philosophy before you look for a capital partner we.


Started franchise Equity Partners, we actually thought the biggest profile of our partner would be the first group that Rick described. So for example, in the automotive space.


The average age.


Of a automotive dealer owner is 71 years old.


So that is somebody who's kind of in the back nine of their career, they probably want to start doing some very rigorous estate planning. If they haven't done it already, they want to take chips off the table and diversify, maybe set up a charity or family office. So we thought our capital would.


Actually be very well attuned to that group. Well, we found.


Out you were complete.


Wrong. The partners, who tend to actually seek us out are the 45 to 55 year old entrepreneur who has got a lot of gas in the tank who has seen the success of the 1002 thousand store. You know Flynn type operators and want to go from where they are.




There and what they realize is to do that they need a capital partner that's got a checkbook and it's got a range of skill set. So I think when people think about the partner that they're looking for before they think about that partner, it's probably good looking inward and looking in the mirror and saying.


What do I actually want to achieve the next 10 to 20 years of running my business and use kind of the capital partner as a means to an end rather than an end in and of?


Self I I think the other thing that I can't emphasize enough that Rick alluded to around failed deals and and kind of it's not just easy money in the private equity space. We've seen a lot of operators agree to partner.


With independent sponsors who really don't have committed funds or committed.


Capital and Rick can attest to six month, 12 month, 18 month processes that ended with a lot of legal bills and accountants bills because the capital provider that came to the table didn't really have funds to back them up. And I think just is just a matter of.


Least due diligence. Not only do you want to make sure you like the person, but you want to make sure they actually have the capital committed to achieve the objectives you want to achieve.


It's a big issue, I mean, no doubt about it. When you hear independent sponsor, that's somebody who's got a phone and an e-mail account that doesn't have any money. So that's someone you got to know about.


And I think that some of the there's been some very successful deals with PE going back to I I think I did the very first deal in 1997 with Sentinel, but they've been a lot of very successful deals. And when I look back on them over the years, what I see is that.


The firms that you know depended on leverage and multiple expansion. If they timed it right, they did OK and if they didn't, they didn't. What I mean by timing is not necessarily the economic environment, although that's important. I mean the, you know the sine wave of restaurant fortunes.


Well, and there are times when these these restaurant concepts can't do anything wrong and sales keep going up. Margins are going up. Everything's great. People throw money in there like confetti and there's times when you can't get a bank to talk to you because there's been so much delays in the brand. And so I do think that if you're just coming in trying to get lucky.


On a nice leverage check and multiple expansion, that's not a very solid strategy and for a franchisee, they should be wearing that. And then a PE shop should as well.


And I think that some of the things that we talked about that we do at Sep with the capital markets program, with the data analytics team, with comprehensive P&L management and looking, you know no stone goes unturned and you need a partner that agrees with all that and is comfortable with that and is capable of taking feedback or or constructive criticism.


If you've got that, then you have, I think the leverage and multiple expansion can help you if it does, but even if it doesn't, there's money to be made if you bring some skills to the table and that's being a real partner, not just walking into the casino and putting a bunch of cash down on red 24.


And then the other thing I would say is.


That you know, in the beginning there should be a real, thoughtful conversation on philosophy of remodels and development and acquisitions and P&L management that that both parties are not leading the hard conversations for after the deal closes. But actually saying, look, we want to build, we want to remodel on time, we're leaving in advance.


We want to do things that are accretive and you know, we just want to make sure that we can agree on that and that's not going to be forbidden territory because somebody's one party is more interested in distribution. The other party is more interested in growth.


I might jump that you know, Kevin, you you said something that that reminded me the private equity you know is is very much growth minded. Scott mentioned it too. I think if you are an operator and you've heard about private equity investors and you're looking to if you're thinking that that might be a way for you to grow.


Would would it not be a good idea just as I mean just like one of many things to think about to say is my brand a brand where like the unit count is growing and I could build more stores because that's kind of the primary. I mean you have you can have same store sales going up, you can grow your acquisition.


But the primary, you know, but really one of the primary ways in which private equity firm gets the return is when you have the unit development. And if you don't have a brand that has.


That you as an operator probably should be thinking on. I may not be a a good a good candidate for most private equity groups. Is that a fair statement because a lot of the brands that we that I mean not in automotive necessarily, but a lot of the brands that we're talking about here and that we're involved in on a day-to-day basis are legacy brands aren't they that have 1 to 2% same store sales growth unit.


Counts are dropping by 1:00 to 2:00 to 3:00 to 4% a year.


And it's, you know, really the only way to to grow is through acquisition and the strategy of trying to get a beachhead investment or you know, invest with a with, with an operator and then add tack on acquisitions at the lower price. It's really not playing out to be that good of a strategy necessarily. I think a lot of that is is doing homework on brands and then also looking at.


You know, saturation in consumer and I think a lot of people make an investment or two in this sector and and think that they are experts.


And you know, after 30 years of work, 35 years of work, you, you, you can clearly say you're probably not an expert because there's so many things that can go wrong that you don't have control over. And the best thing you can do is set a good foundation at the beginning with your diligence, who you do business with and.


You know, make sure that.


You know, when I say doing it.


You got there's 400 Taco bells in Florida and there's 400 Taco bells in Ohio. Ohio has 10 million residents in Florida, has 23. Where would you rather be, you know? And these are the kind of things that if you know, if you do that homework up.


Front. You're going to make better decisions and you're going to have a better partner if you both realize where the opportunity is because somebody who's selling in a market that's saturated or has other peccadilloes like California, you're going to have some issues and it's better to identify that up front so that you know, you know what you're getting into and.


How things were actually going to turn out as opposed to, you know, a book that, you know, was kind of rose, rose, colored glasses. Yeah. And, you know, Rick, I was fascinated by some of the stats you quoted at the start around.


Private equities presence almost two years ago versus now, and I made a note to get those numbers from you after our call. But if you actually went back, I'm sure a decade, it would even be greater. And the point is a little bit wouldn't go far as to say the easy money's been made, but to some extent the easy money.


Made and what that basically means is just going back to the well.


To the same set of brands that are shrinking is not a great strategy. In order to really earn your keep and make excess returns, you need brands that are growing with whitespace and you need brands that are growing transaction, not price. And you know there's been two real.


Sins that private equity has committed the past few years and they're bearing the brunt of it in the form of some poor return.


And the first is entering consolidated systems, thinking they would consolidate further and not actually thinking about white space. In fact, because white space didn't really exist anymore. And then the second thing is thinking, you know, you could take price by you know 5% but transactions.


Drop 3 so it's all OK at some point you take it one step too far and that model collapses. So what you really need is that real fly.


Wheel of a solid brand that's got a lot of money to continue to develop and spend on advertising that gives their franchisees an opportunity for like space and the franchisees have the ability to grow transactions, grow customers and not rely a little bit on the sugar high.


With taking a few points in price every six months, because that engine ultimately fails.


That's a great point, and I'm bullish on the future of the industry and the into Scott's point like these legacy brands, it's a lot of, it's been combed over at this point and picks through.


I got a daughter who's a second year student at Baylor University in Waco, TX, and they've got this area next to their campus called the Grease Pit. Everybody calls it the grease pit and you drive to go under the bridge and go over there to the grace pit. And on one side of the road, you got all the legacy QSR brands have been around for 20 years. And on the other side of the road, you got these like.


HTO and Kava. And you know in and out burger and you know, Hawaiian brothers and Dutch Brothers, coffee and all these like newer concepts. Right. And if the three or four of us just sat there on the street and just watched the the patterns of.


The customers we would come to an inevitable and quick conclusion that there's a lot of optimism there to be had in some of these new brands going forward. Some of the people who'll be listening to this are people who are in those brands and have 10 or 15 locations and they're the ones that have a white space that could be another 50 locations.


Across three states over the next five years, and those are the very ones that are the right types of people because most of the franchisees who are like that are younger these Scott, you know, said these 45 to 55 year olds who have a lot of ammo in the tank still and want to do it. The problem is that.


They're just a little bit too small most of.


Right now, but that's one of the reasons why I'm really kind of positive about the next wave of this business and of this industry, it's.


That we've kind of, we're migrating, there's.


Going to be casualties and dead bodies along the way and we're going to see them with tons of store closures over the next 18 months. It's going to happen, man, you're going to see thousands of stores closing.


But like you.


Get past this four to five to six to seven.


Year window and I.


Guess I'll be. I mean, we'll hopefully I'll be young enough to still be.


A part of.


It and I kind of get really bullish and optimistic about what happened 7 to 10 years from now when some of these concepts can kind of like redefine the franchise business. Some of them will do well.


Some will do great though.


Well, thank you all for that fabulous discussion. Pivoting to Scott and Kevin now in regards to franchise Equity Partners, what can we expect this year?


Well, that's a that's a great question. And I'm sure whatever I expect I'll get it completely wrong. But you know, we basically focus on five different verticals, so restaurants, automotive dealership.


Beverage distributors, heavy machinery, and our vaunted other category, which is just general consumer and business services. If you add everything up, we have about 750 multi unit retail locations across all our different brands. I think on the restaurant.


Side, as Rick alluded to, I think the strategy he framed.


Right. We will look for some interesting high growth markets and attractive parts of the country for the legacy brands. We will look to try to plant a flag in some of these emerging brands.


That have a lot of growth in front of them, but have enough of a proven track record that could be in snacks and coffee are two great examples of that. I think on the automotive front, we're at an interesting pivot point with the supply chain pressures behind us and we'll look to continue to grow out.




In the Midwest, Florida, Texas and the Pacific Northwest, and we also really, really love the residential services businesses, everything from HVAC, plumbing, electric to we have a very large garage door business with the largest franchisee in the neighborly.


The system, and we think just serving customers in the residential space looks a lot like QSR did 20 years.


You know, it's just a core business that people need. If you partner with great brands that take care of the customer, there's a lot of runway for growth. But you know just where restaurants were 20 years ago, residential home services remains very, very fragmented. We see an opportunity to not only.


Grow but serve as a consolidation platform in that space.


And Rick, how about unbridled? I know you just closed some pretty big deals, but you know what what's coming?


Up. Thanks for asking I.


Think we'll just keep doing what we do you.


So give me a pickaxe and I'll just keep swinging it at the ground. Got a great little team and we try to keep a 90% success rate in the in the assignments we take, which means for every 20 assignments we take, we want to be closed in 18 of them. You know, that's kind of our model. So we're decidedly choosy. And in this, I think one thing we haven't talked much about, it's probably not the right forum.


The marketplace isn't the best right now. You know some brands are doing well, but in in many we're meeting declining traffic, flattish sales and we're also got high interest rates and kind of tough lending environment a little bit.


So we've taken a lot of phone calls and turned down a lot of assignments this year. I think I think almost 10 in the last 60 days. I don't personally want to get involved.


In food deals.


That that won't close, so we can't be.


Perfect all the.


Time. But so I think we'll just continue to kind of quietly do what we do. We kind of expanding the breadth and the size of our business in terms of the size of our transactions and the number of brands that we're operating.


Again, and just, you know, I don't know, just trying to keep making her free throws, you know, and hopefully we can get UConn knocked off this year from the national championship.


Slot I don't.


Know what you got to think, but I don't want him to go win again. Do you guys, let's shoot for.


Alabama, you know.


Exactly. Roll Tide.


There you go.


Well, thank you so much, Scott, Kevin and Rick for your insight today and thank you to our audience for watching. Stay tuned for our next webinar, which I'm also moderating when we talk about growth from some of our winning deal makers. Thanks everybody.


Thank you very much.


Thank you. Thank you, Emily.


Thanks so much for entering the boiler room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise, M&A and financial resources in the industry. Our website includes webinars, podcasts.


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